UOB Kay Hian’s Jonathan Koh has raised his target price on Digital Core REIT (DCR) from US$1.18 to US$1.32 and maintained his “buy” call on the stock.
In a Feb 14 report, Koh says he expects DCR to explore the acquisition of data centres in the Asia Pacific region, namely, in Singapore and Australia, as well as Europe, in countries like France, Germany, the Netherlands and the UK.
These acquisitions will be from its sponsor pipeline from sponsor Digital Realty, which is the largest global provider of cloud- and carrier-neutral data centres, colocation and interconnection solutions.
Koh notes this allows DCR to scale up rapidly due to its sizeable sponsor pipeline. Furthermore, DCR is the exclusive S-REIT vehicle of Digital Realty, which has granted DCR a global right of first refusal (ROFR) on its growing data centre pipeline worth over US$15 billion.
He also highlights that its ability to scale up through acquisitions is supported by its strong balance sheet, with low aggregate leverage of 27%.
Furthermore, it is able to tap on sponsor’s relationship banks and has a competitive cost of debt at 1%, which leads Koh to say that DCR is poised to scale up rapidly.
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As for its acquisitions, he expects DCR to focus on stabilised data centres in developed markets, adding that Digital Realty owns 75 data centres in these preferred markets that will “enhance DCR’s geographical diversification.”
Koh has forecasted the acquisition of data centres valued at US$500 million as at end-2022, with full contributions in 2023.
This is on the assumption that DCR holds 90% interest, a cap rate of 4% and a net profit interest (NPI) margin of 60%.
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His view is that the acquisition will be funded by equity fundraising of US$100 million and additional borrowings of US$350 million, and estimates aggregate leverage at 37.3% post-acquisition.
As such, he foresees a “decent boost” to DPU in 2023, raising his DPU forecast by 14.3% to 5.2 US cents after factoring in the potential acquisitions.
Koh also highlights that DCR trades at a price to net asset value ratio (P/NAV) “at a huge discount relative to peers.”
Based on a US$1.16 closing price on Feb 14, DCR currently trades at P/NAV of 1.38x, compared with other data centre REITs that are trading at an average P/NAV of 1.57x. Keppel DC REIT trades at 1.34x, and Mapletree Industrial Trust at 1.80x.
As of 12.28pm, units of DCR are trading at US$1.12, with a FY2022 price to book ratio of 1.4, while dividend yield stands at 3.7%.
